The E-Cig Market Is Still Smokin'

Although the Food and Drug Administration will undoubtedly try to snuff out the emerging electronic cigarette market when it reveals its soon-to-be-released regulations, the industry continues evolving in new, unforeseen directions that will leave regulators, antismoking crusaders, and politicians scrambling once again to catch up.

According to Wells Fargo, sales are on fire and far surpass original estimates because of innovations and variations that are a natural outgrowth of an unregulated industry. Because early numbers focused only on so-called "cig-alikes" -- those devices used as a form of nicotine-replacement therapy to deliver nicotine more safely -- sales data has dramatically underestimated how far the market has grown, perhaps by as much as 60%. The analyst now estimates the total e-cig retail market in the U.S. at $2 billion as second- and third-generation devices begin to eclipse sales of original e-cigs.

While e-cigs still command the lion's share of the business today, warranting the huge investments made by Lorillard (NYSE: LO) , Altria (NYSE: MO) , and Reynolds American (NYSE: RAI) , vapors, tanks, and mods -- VTM, for short -- are taking the industry in new directions that Wells Fargo believes could serve to "reaccelerate growth and reinvigorate the e-cig industry."

Second-generation devices. Source: Wikimedia Commons.

It's become de rigueur that every new industry develop its own lingo. Personal vaping systems, or PVS's, are essentially electronic cigarettes, but further evolved from those that merely mimicked the look of a combustible one, glowing ember and all. Instead, these "mods," or modified e-cigs, while also used for vaporizing nicotine e-liquid, tend to be big battery PVS's, though they're also referred to as "vaporizers," "wands," or "vape pens." Tanks are "juice"-delivery systems that use different methods of getting the e-liquid to an atomizer to be warmed before someone "vapes" them.

The tobacco giants are introducing their own branded versions of e-cigs like Vuse and MarkTen that should help expand acceptance and proliferation of the e-cig devices, but Altria also just bought e-vaping specialist Green Smoke, one of the most popular e-cig brands, that brings with it significant e-vapor expertise and experience and should complement its NuMark division's supply chain.

Even though growth rates are slowing from their original meteoric uptake, e-cigs are still expected to expand 15% annually as convenience stores devote as much as 31% more shelf space to the product. So we're nowhere near a fully mature market yet, and analysts still expect e-cigs and all their variations will soon surpass traditional combustible cigarettes in sales.

Wells Fargo does envision a bit of commoditization occurring as more brands are introduced and vaping generally takes hold, a development that could impact pricing and ultimately profitability. VTMs pose perhaps the biggest threat to both cigarettes and cig-alikes, but what they lose in price they ought to largely make up in volume.

There's also the burgeoning international market as well. While Europe banned the sale of e-cigs with nicotine concentrations higher than 20 milligrams per milliliter, U.K. sales last year surged 340% from 2012 and there are now some 1.3 million e-cig users in the country. Altria in particular has been mindful of the global potential and recently partnered with Philip Morris International (NYSE: PM) to market and distribute e-cigs and other smokeless tobacco products worldwide.

Despite those who want to kill off smoking altogether, e-cigs have proved to be a healthier alternative to tobacco smoking -- London Economics estimates the recent EU ban on higher-nicotine e-cigs could prevent 105,000 lives from being saved in Europe -- and people are moving away from "cigarettes" altogether into a vaping lifestyle that has nothing to do with smoking at all.

In calling for the FDA to issue new rules sooner rather than later, Congress recently detailed a bunch of concerns it wanted addressed, such as limiting access and marketing to adults, things I'm sure the industry wouldn't necessarily oppose anyway. But such efforts are a rearward view of things, and with vapors, tanks, and mods on the upswing and possibly becoming the dominant form of vaping, the rules are bound to be anachronistic as soon as they're unveiled.

E-cigs generally, and VTMs specifically, are poised to smoke tobacco sales, and with the cigarette companies heavily invested in the smoking alternative's growth, we should expect they'll be able to generate handsome profits still.

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